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How to Challenge Your Business Property Taxes

Property taxes can be a costly part of owning a business and impact your bottom line. 

You should treat them like other big business decisions instead of simply accepting them as an accounting line item. You could be paying too much in property taxes and might have grounds to challenge your bill. You first want to understand how taxes are calculated and grounds for appeal.

How Do Property Taxes Work?

Local governments levy taxes on property owners. These funds are used to provide various services, including schools, police, fire, and garbage collection. Property taxes are calculated using an assessment ratio to the property's fair market value.

What is the Difference Between Property and Real Estate Taxes?

Real estate and property taxes are interchangeable terms. The IRS uses the term real estate taxes, but they're the same in all aspects. The money collected helps the government fund services for the community.

How Are Real Estate Taxes Calculated?

The real estate calculation process is complex and varies by county. Although there's no universal formula used to calculate commercial real estate taxes, your business tax bill is generally calculated by multiplying your property tax rate by the assessed value of your property. The higher the assessed value of your property, the more you pay in property tax for your business.

How is the Assessed Value Determined?

Many residential properties are similar, making it easy to determine their value based on comparisons to other properties. A residential property value is usually determined using the sales comparison approach. This takes into consideration the sales of single-family dwellings in the subject’s market area and competing markets that are considered most representative of the subject. Upon review of this data, a qualitative analysis will be made for, but not limited to, characteristics such as age, condition, size, location, sales concessions, lot size, adequacy, functionality and external inadequacies. The result will be to determine a value for a similar dwelling and adjust it to the subject in order to determine an indicated value.

Valuing a commercial property is very different from evaluating a residential property. While a residential appraisal generally measures the property's value based on location, size, and general amenities, commercial properties warrant customized reviews due to the complexity of variations. Commercial appraisals take longer than residential appraisals because they are more complex.

For commercial and industrial properties, appraisers use one of four different methods to value a property:

  1. Income Approach. This standard valuation method considers the earning figures of comparable properties to determine how much income a business in this property could hypothetically generate. The method is commonly used for apartment buildings, shopping centers, offices, and other properties with earning potential.
  2. Cost Approach. The cost approach assesses how much the property would cost to build in the current market, considering land prices, materials, labor, construction, and expected depreciation. The appraiser estimates a value based on the replacement cost to build the subject property. This method can be helpful for newly constructed buildings or ones that are unique to the market.
  3. Sales Comparison Approach. This is regarded as the most straightforward valuation approach. It compares the property to the sales prices of similar properties in the area. Adjustments are made for superior and inferior characteristics such as size, location, floor plan, and overall condition. While residential appraisers have plenty of similar properties, commercial appraisers often don't which can make this approach more challenging depending on the unique characteristics of the subject property or a lack of comparables with the subject’s market.
  4. Gross Rent Multiplier Approach: Like the sales comparison approach, this method compares the gross rent of similar properties in the area to reach the property's appraised value. The appraiser will determine how much rent the property will collect relative to its assessed value. With this method, the projected value of the property is divided by the projected income of the property to determine a Gross Rent Multiplier, which can then be used to compare the subject to similar income generating properties.

How to Appeal Your Commercial Property Tax Bill?

When tax invoices are mailed you can challenge your tax bill if you suspect your commercial property is over assessed. You can appeal the assessed value or a rejected exemption for your property. Millage rates (tax rates applied to real estate) are consistent throughout the municipality and are not negotiable.

Before filing an appeal, you will want to document why you believe your property is over-assessed. Work with an appraiser to determine if you have grounds to challenge your commercial property tax bill. Be prepared to refute the assessment office’s sale data, income projections, or cost estimates used to value your property.

Assessment Evaluation works towards obtaining an accurate assessment of your commercial property. We evaluate the local real estate market and the sales prices of commercial properties on a continuous basis to stay up to date with current trends and values.